Hotel Chain Resurrects Bankrupt Software Maker

Why did Starwood Hotels pick software from PurchasePro—three months after the dot-com filed for bankruptcy?

Three years ago, Starwood Hotels & Resorts Worldwide's strategy for buying supplies online was dead in the water. To resuscitate it, the company bought the software of a failed vendor.

How's that again?

The hotel chain had struck an exclusive agreement in 2000 with Zoho Corp., a Web-based buying exchange for the hospitality industry, to make its $3 billion in annual spending more efficient. Starwood planned to invest as much as $30 million in Zoho, but the startup folded in 2001.

So, Starwood bought new software. From a different dead vendor. In December 2002, Starwood sealed a deal to implement a new electronic procurement system that would use software developed by PurchasePro, a Las Vegas-based Internet startup that had filed for bankruptcy three months earlier.

Yes, Starwood—which owns, manages or franchises 733 hotels worldwide—wanted to run a key piece of its business operations by bringing back to life a dead vendor's technology.

It's one thing for a company to continue to use and maintain code developed by a bankrupt vendor, if it has deployed the software. But for a business to acquire a defunct startup's software for a brand-new project, as Starwood did, is unusual. And it's usually a bad idea, says Rick Chapman, managing editor and publisher of Softletter, which tracks the business software industry. "I've seen this happen a few times; disaster invariably ensues," he says. "If you're going to buy a software company, you'd better know how to run one."

Roy Shanholtz, Starwood's director of electronic commerce, begs to differ. Going with the PurchasePro application, he says, was a "no-brainer."

Here's why: Unlike Zoho, PurchasePro had demonstrated traction with customers, including the hotel chains Accor and Hilton Hotels. "PurchasePro was already a proven player in this space," Shanholtz says.

Next, Starwood was able to negotiate an exclusive, perpetual license for the latest code PurchasePro had been cooking up—for a song.

Starwood bought the rights to PurchasePro's software from Perfect Commerce, an e-commerce vendor now based near Kansas City, Mo. Perfect Commerce paid $2.6 million in cash for PurchasePro's assets, including its software, according to a January 2003 regulatory filing by the company managing the bankruptcy proceedings. Shanholtz wouldn't disclose what Starwood paid, but says it was far less than that.

Finally, the PurchasePro software lets Starwood "skin" its purchasing system to provide different features for the various buyers using the system without altering any of the back-end code. For example, Starwood can show a different mix of products based on whether someone is with a franchisee or with a Starwood-owned hotel. Shanholtz says that kind of capability was unavailable from e-procurement packages offered by Ariba, Commerce One and others.

The feature is crucial for the next phase of the project. By January, Starwood wants to have the e-procurement system tied directly into its SAP financial reporting system, to automatically deduct expenses from the general ledger whenever a supplier fulfills a purchase order for one of its own hotels. With the PurchasePro software, Starwood hotels will see the SAP-enabled expense-reporting functions, but independently operated franchises won't.

"We're grasping a greater amount of control over the buying process," Shanholtz says.

Today, Starwood's procurement system, which it calls StarSource, lists 175,000 items available from 60 suppliers, everything from soap and toilet paper to beef and beer. Last year, it handled $210 million in purchases by about 160 Starwood hotels in North America.

When Vendors Die

PurchasePro was whipsawed by Internet mania. Founded in 1996, the company went public three years later and soon hit a stock-market capitalization of $1.2 billion. But the company, true to the dot-com cliché, never reported a profit, losing $272.2 million on sales of $38.8 million in 2001.

The coup de grâce: Federal regulators charged PurchasePro with fraud related to the way it reported revenue from a marketing agreement with America Online. In cases that are still pending, the U.S. Department of Justice has charged PurchasePro founder Charles "Junior" Johnson, along with three other company executives, with securities fraud stemming from the AOL deal.

To protect themselves from such collapses, companies routinely reserve the right to secure ownership of an application's source code if the vendor goes under. Information-technology managers say it's especially prudent to have such a software-escrow clause when dealing with a startup whose prospects for a long life are uncertain.

At least one former PurchasePro customer invoked that clause. BuyEfficient, a purchasing consortium that is a division of Sunstone Hotel Investors, runs an electronic marketplace on an older version of PurchasePro. The system is used by 860 hotel operators to buy goods from more than 800 suppliers.

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